The Pakistan Business Council (PBC) has called on interim Finance Minister Dr. Shamshad Akhtar to pay attention to a “bigger leakage of revenue” to the tune of roughly Rs. 1 trillion from under-invoicing of imports.
In a letter, PBC emphasized its previous recommendations to the government to enter into agreements with its main trading partners for data sharing, swift recovery of lost revenue from importers, and securing agreements on Electronic Data Interchange to gain information on export values to match import declarations in Pakistan.
PBC said it has repeatedly shared with the Federal Board of Revenue the significant disparity in export values reported by China, Singapore, Germany, and the United Kingdom of their exports to Pakistan and the declared import values as reported by Pakistan Customs to the International Trade Centre (ITC), a multilateral agency which has a joint mandate with the World Trade Organization (WTO) and the United Nations (UN) through the United Nations Conference on Trade and Development (UNCTAD).
Every calendar year, countries other than those from the GCC, report their trade figures. The extract from ITC in respect of trade for calendar 2022 between Pakistan, China, Singapore, Germany, and the UK was as follows:
Exporting Country Reported Exports to Pakistan (in US$ Millions) Declared Value of Imports by Pakistan (in US$ Millions) Disparity (in US$ Millions)
China 23,090 16,340 6,750
Singapore 1,280 880 400
Germany 1,270 940 330
UK 750 720 30
Total for these 4 countries 26,390 18,880 7,510
Under the ITC convention, countries report (and Pakistan levies duty) on imports on a cost, insurance, and freight (CIF) basis, whilst exports are reported on FOB values. PBC opined that depending on the distance, value, volume, or weight of goods shipped or air freighted, the insurance and freight cost can range between 10-20 percent of the value shipped.
Using 10 percent as a minimum, the disparity in reported values mentioned above would rise from $7,510 million to $8,261 million, equivalent to an average 2022 exchange rate of Rs. 205/$ at between Rs. 1,539 billion and Rs. 1,693 billion.
Based on total trade disparity before adjustment for insurance and freight cost, and on three different assumptions of aggregate customs duties (CD, ACD, RD) i.e., 10 percent, 15 percent, and 30 percent. To this, PBC argued there needs to be added GST at 18 percent of duty-paid value and Withholding Income Tax of 6 percent on GST-paid value.
On this basis, the tax revenue loss suffered by Pakistan in 2022 at Rs. 205/$ average exchange rate, is estimated at between Rs. 578.8 billion to Rs. 963.9 billion, as follows:
On Assumption of Aggregate Duty (CD, ACD, RD) Revenue Loss on Account of Duties (Rs. Billion) Revenue Loss on Account of GST @18% (Rs. Billion) Revenue Loss on Account of Withholding Tax @6% (Rs. Billion) Total Revenue Loss (Rs. Billion)
10% 154 304.9 119.9 578.8
15% 230.9 318.6 125.3 674.8
30% 461.9 360.3 141.7 963.9
A revenue loss of Rs. 578 billion at a low 10 percent cumulative duty rate is significant, let alone nearly Rs. 1 trillion on the more likely 30 percent cumulative duty. The exact loss will need to be determined by the FBR/Customs by reference to actual duty rates on the items imported and in the case of China, whether a concessional rate applies under the FTA. In any case, the revenue loss is unlikely to be below Rs. 578 billion.
PBC emphasized its past recommendations to the government to enter into agreements with its main trading partners for Electronic Data Interchange (EDI) on trade, which could potentially give real-time transparency on export values. Some attempts were made in the past but technical and other reasons, including resistance from trading partners, have thwarted this effort.
This needs to be renewed, said the Council, this time with determination similar to the government’s efforts to thwart smuggling and misuse of the Afghan transit trade. Secondly, when Customs receives information through EDI or otherwise of disparity between export and import values, it should move swiftly to recover lost revenue from the importer.
Finally, now that Pakistan has entered into an FTA with GCC, details of which need to be shared, it is vital that Pakistan secures EDI to gain information on export values to match import declarations in Pakistan.
Source: Pro Pakistani